Commercial sales and NPD offset Thorntons' retail woe

Higher commercial sales coupled with new product development could help Thorntons offset its high street sales slump, according to Investec analyst David Jeary.

Thorntons’ commercial sales rose sharply in the last financial year by 22% to £62.6m, but the chocolate firm’s retail sales slumped 3.7% to £152m, meaning pre-tax profits of just £6.1m were announced on Wednesday, compared to £8m in 2008/9.

As the UK’s last independent, publicly listed chocolate maker, Thorntons is struggling on the high street, with most of its 377 shops and 222 franchises hit by falling sales.

Franchise outlets performed even worse, with sales falling 14.7% year-on-year, confirming a prevailing recessionary trend that saw significant franchisee Birthdays file for administration in May 2009 and major customer Woolworths collapse the year before.

Increased corporate demand​

However, in a note on Thorntons this week, Jeary said there were grounds for optimism, citing increased corporate demand, specifically in the leisure and hospitality sectors, as well as “higher ​[income] forecasts in commercial and franchise” ​following two new licence agreements, for biscuits and chilled desserts.

“The better growth prospects in commercial (30% of sales), driven by ongoing product innovation, should offset the continuing challenges of retail, where the onus of proof remains on the company to show it is managing a downscaling of the business.​

“That said, an average lease life of just over four years and deflationary trends in property costs give Thorntons flexibility on this score.”​

Gross margin performance ​

Jeary said that Thorntons’ action to reduce net debt – from £26.7m at the end of 2008/9 to £26m this financial year – was also good news, and that gross margin performance (the difference between production costs and sales) was “stronger than we had forecast.”​

However, Jeary warned that issues negatively affecting sales margins included a “higher level of discounting within retail and other adverse product-mix movements.”​

​

More specifically: “The combination of higher raw material costs (both cocoa up 25% over the year and butter up 66% since July 2009)…is likely to exert downward pressure on gross margin percentage ​[for the year ending 2011]…in our view.”​